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Near-term outlook weak despite an uptick in Capco

Performance under the new CEO is a key monitorable

* Wipro (WPRO)’s IT Services revenue was down 0.3% QoQ in constant currency (CC) to USD2.66b in 4QFY24 (50bp below our estimate). The company’s order intake declined 14% YoY to USD3.6b, with large deal TCV at USD1.2b (up 9.5% QoQ). Management’s 1QFY25 revenue growth guidance was modest at -1.5% to +0.5% QoQ in CC terms.

* Despite the decline in revenue, WPRO has managed to improve its IT Services EBIT margin by 40bp to 16.4%, in line with consensus expectations. This was driven by better cost control and a reduced employee count.

* While WPRO’s 4QFY24 performance was largely in line with consensus, management highlighted a persistently weak demand environment and ongoing ramp-downs in existing books. Further, a few small-sized engagements continue to hinder near-term growth for the company.

* We find the momentum at Capco encouraging, which signals early signs of improvement in the macro environment. While the near-term outlook for consulting remains robust, the leakage in existing books and weaker demand for IT Services would continue to impact near-term growth adversely.

* WPRO delivered an EBIT margin of 16.4% (+40bp QoQ) in IT Services despite weak growth, thanks to a significant improvement in utilization (+290bp QoQ). However, given the peak utilization, we do not anticipate any material margin improvement in the near term. Management has guided that nearterm margins would remain range-bound. We expect WPRO to deliver IT Services EBIT margin of 17.1%/18.2% for FY25/26, which should translate into a 13% CAGR in PAT over FY24-26E (in INR terms).

* The operating performance of WPRO has remained subdued over the past decade, despite several changes in leadership. The new CEO does not plan to revamp the organizational structure and prioritizes reviving growth in the near term. The performance of WPRO under the new CEO will be keenly monitored by investors before any meaningful re-rating.

* We trim our FY25E and FY26E EPS and reiterate our Neutral rating, as we view the current valuation as fair. Our TP implies 18x FY26E EPS.

In-line 4QFY24; modest 1QFY25 guidance

* WPRO’s IT Services revenue was down 0.3% QoQ in constant currency (CC) to USD2.66b in 4QFY24 (reported USD growth was flat QoQ). This was 50bp below our estimate but in line with consensus.

* BFSI (+2.1% QoQ CC) grew well, while Technology (-6% QoQ CC) and Communications (-4.8% QoQ CC) dragged the growth during the quarter.

* IT Services’ EBIT margin of 16.4% (+40bp QoQ) was in line with consensus.

* TCV stood at USD3.6b (-14% YoY CC), while large TCV was at USD1.2b (+9.5% YoY CC) during the quarter. ? Management’s 1QFY25 revenue growth guidance was modest at -1.5% to +0.5% QoQ in CC terms.

* WPRO’s net profit of INR28b was down 7.8% YoY (4% below our estimate)

Key highlights from the management commentary

* Management indicated that the market has not changed fundamentally in terms of demand. It is witnessing some stabilization in BFSI, driven by Capco. The slowdown in discretionary areas continues, especially in smaller projects.

* Capco built on the momentum from last quarter and clocked a strong sequential growth with bookings and revenue growing 43.6% and 6.6% QoQ, respectively.

* Capco is seeing a secular uptick across geographies and service lines. WPRO is winning a lot of synergy deals with Capco, which should drive downstream revenue opportunities. The collaboration with Capco has improved over the last four quarters.

* Management indicated that near-term margins are likely to remain range-bound. Valuations & View

* Given WPRO’s weak 4Q exit and the near-term impact of the new CEO, we expect its FY25 revenue growth to be one of the lowest among Tier-1 IT Services peers.

* We reiterate our Neutral rating as we look forward to: 1) the execution under the new CEO, and 2) a successful turnaround from its struggles over the last decade, before turning more constructive on the stock. Our TP of INR490 implies 18x FY26E EPS.

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